“This Budget will see Chancellor Rishi Sunak attempt to balance the demands of the Government’s Covid-19 response with the need to ensure the UK public finances’ sustainability. With political focus inevitably on the very short term, the Chancellor’s challenge will be to reconcile demands for continued support with manifesto promises.
“The Treasury had at one point been expected to use this Budget to start increasing taxes, and whilst we do expect to see a higher taxed environment for both corporates and individuals, we expect change to be incremental. Certainly, there is a risk of ending a financial recovery before it even begins if any government is too aggressive on taxation policy, or risks falling out of favour if they raise taxes too close to a general election.”
Capital Gains Tax
“The greatest concern amongst clients is the mooted increase in the 20% rate of capital gains tax (CGT), to bring it in line with the current rates of income tax of 45%, as a means of levelling the playing field. Many clients are considering if they should crystallise their capital gains tax now at current rates in anticipation the Government could raise them, and indeed, in some instances, uncertainty has prompted clients to bring succession plans forward in order to lock in current CGT rates as they are.
“However, while we are not tax advisers, our guidance remains nuanced in these circumstances. Whilst we don’t anticipate any major hike to CGT, and any increase might not necessarily see it levelled to the full 45%, making the decision to crystallise assets ahead of Budget day, or not, is all down to helping a clients’ piece of mind. Our view is always to keep long-term goals in sight.”
“There has long been speculation that the government could introduce some form of wealth tax, to alleviate economic inequality by focusing on those with the most wealth. Covid-19 has exacerbated the perception and reality of economic inequality in the UK and there has again been some focus in the leadup to this year’s Budget on how those with the most wealth are taxed.
“Whilst the idea of introducing a wealth tax has long been discussed, it’s not since the Wealth Tax Commission concluded in December 2020 that the UK could stand to benefit from introducing a one-off wealth tax (made applicable to those with a personal wealth of £500,000 made payable over 5 years), that the professional community began to take note.
“During a Jeremy Corbyn led opposition, clients were particularly concerned by the prospect of a wealth tax, as well as exchange controls and income tax rising to 1970s levels, and many of our conversations with clients were dominated by this one topic. We’ve been having more of these conversations since the Commission’s latest report.
“However, we have seen many countries struggle to implement a similar wealth tax, with it not raising the revenue expected. For example, France sought to implement a wealth tax but ended up raising property taxes instead as a more effective means of raising revenue. Moreover, Norway and Switzerland both have wealth taxes but no inheritance tax so one could argue the former is replacing the latter.
“The Wealth Tax Commission did put forward a strong argument and a robust design to manage potential avoidance. However, clients are naturally sceptical about the notion of a one-off tax charge. Take Spain, when it reintroduced a wealth tax in 2012 it was supposed to be for a very limited time only, but it continues to this day. Moreover, it feels like such a fundamental change in tax policy should require some agreement from the public.”
But until all is revealed on March 3rd, what does it mean for looking after your clients’ affairs and planning in the run up to the tax year-end?
“Whilst it is understandable to defer making any radical decisions until after seeing what the Budget has in store, there is also a risk of inertia. Arguably, financial planning that utilises annual tax allowances is a sensible approach regardless of the outcome of the Budget.
“Whilst we always remind clients to make the most of their capital gains allowances before the tax year end, it makes sense to take these allowances sooner rather than later and we have seen more clients wanting to crystallise their CGT allowances pre-Budget.
“Within the same vein of focusing on those with greater wealth, there has been ongoing discussion that there may be amendments made to the pension tax relief for higher earners. Despite there being little changes in recent years to pensions, there is always speculation in respect to pension reforms prior to the Budget.
“It seems like this year Chancellor Rishi Sunak will opt to leave pension tax relief alone favouring restrictions on the increase of the Lifetime Allowance. However, it will not be long before speculation returns and the notion of a flat rate of tax relief on pension contributions returns.
“Whilst we do not expect to see any meaningful changes made, continued speculation means there is potentially an added incentive in taking advantage of these allowances whilst they are available.
“Indeed, it seems that currently the pension tax relief for higher earners is in particular not being taken advantage of. So, whilst the removal of such a benefit may be unwelcome, perhaps those who currently have this advantage and have not made use of it should make sure they benefit from it whilst they are still able to.”